UK Inflation rises to a 8 year high of 3.6% (RPI), whilst CPI dips to 2.4%

By: Sarah_Jones

UK Inflation rose strongly taking the more recognised and reflected rate of price inflation in the UK economy, RPI from 3.4% to 3.6%, despite the recent fall in crude oil prices. The goverments preferred measure dropped as expected from 2.5% to 2.4% as the price of petrol fell by 6.4 pence per litre.

The rise in RPI is further confirmation that a rate rise in November is virtually a done deal, as the decline in the CPI is temporary given the gap now developing between RPI and CPI measures of inflation.

Additionally the futures markets are strongly pricing in further rate rises, current 2 rate rises are priced, with the most probable date for the 2nd rise being January 2007. The rise in RPI will also mean increase in goverment expenditure on benefits and pensions as the Sept RPI figure is linked to year on year rises.

Last August, the Bank of England's Governor, Mervyn King, warned there was a 50-50 chance that inflation would hit three percent over the next six months and a good chance it would lift above three percent over the next two years. This would force the Governor to write an explanatory letter to the British Government for the first time since the Bank was given control of interest rates in 1997.

The British Pound rallied on the expectation of further rises in interest rates.

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